We spend a lot of time here at OVP meeting with entrepreneurs determined to make the healthcare system more efficient and effective. For me, many of those meetings are somewhat abstract, as I choose to enter the healthcare system myself as infrequently as possible precisely because I find the system both inefficient and ineffective. Yet, as pain in my knee from an injury picked up playing soccer lingered, I decided to overcome my aversion for visits to the doctor and have it checked out. I have a friend who is an orthopedic surgeon, and he told me to call his office and they would squeeze me in. Thus began a long and enlightening journey through two different hospitals that provided a different level of insight to the confusing and convoluted world of providers and payors than is achievable reading healthcare IT business plans, blogs, and industry reports – and suggests that developers of such IT solutions should spend more time doing the same and building solutions with the end user in mind.

A few “highlights” (in the sense of amazement they generated) of the experience:

When I first called about a week before Thanksgiving, the scheduler informed me that the practice did not have any openings until mid-January. When I reached back out to my friend to see if he could find a time in his schedule, he found me an opening the next day; I arrived to find myself as the only patient in the office

He explained the issue related to their recent implementation of an EMR system from Epic, which caused them to intentionally schedule 75% of their normal patient load for three months to be able to work through the kinks of the system

The Epic system is so complicated that Epic provides a full-time, on-site representative for that entire three month period to answer questions and help the staff onboard to the EMR. While I was there, the Epic rep was called in twice to answer a question, and my visit was the last day of the three month training period; the practice was dreading how they would survive without the rep nearby

When scheduling my MRI, they took all of my information to “pre-register” me, a process that took about 10 minutes on the phone; I arrived at the hospital and the receptionist at the registration area instructed me to fill out the exact same information again on a paper form before directing me to another woman at a registration desk who asked me to confirm that same information again as she typed it into the computer; in total, the registration process took about 25 minutes. I then went to the imaging department and filled out much of (though not all) of the same information again on a paper form, and confirmed it one more time for the radiology technician as she entered it into the computer. For those counting at home, that adds up to six times of providing my personal information across the physician office and hospital, three employees who keyed that information into the computer, and three paper forms that are now stored somewhere

Through the entire experience, I never saw or heard a single estimate of what this care would cost, despite having a high deductible insurance plan that would require me to fit most (if not all) of the bill

My first communication from my insurance company was in fact a denial of coverage for a knee brace I required – which I opened literally minutes before I met the rep to ensure the custom-made brace fit properly nearly two weeks after I had ordered it

As someone who invests in healthcare IT solutions intended to directly address these very inefficiencies, the experience certainly validated the Osage Ventures belief that technology can revolutionize the healthcare industry. However, it also demonstrated how far those technology solutions have to go before truly having an impact. Current stats suggest that nearly 60% of physicians use an EMR system[1], up from just 30% in 2006, and the EMR market is expected to grow to $6.5 billion in 2012, a sixfold increase over 2009[2], on the surface implying the huge government incentives under ARRA are having their intended effect of driving a technology revolution in healthcare. Yet the almost universally disgruntled sentiment among physicians I have spoken with about their EMR experiences, all of whom have had a system foisted upon them as part of a rollout at a large hospital, suggests EMRs – and all of the other HIT breakthroughs they will enable once medical data is digitized – are a long way from delivering their promised benefits. The cost (estimates suggest the average EMR system costs $46,000 per physician to implement, which don’t include the three months of reduced patient loads and numerous headaches once the Epic rep is no longer there for handholding) and complexity of the systems that don’t easily fit into physician workflows are the most recently cited reasons for slow (or begrudging) EMR adoption.

These issues feel addressable by new innovators that can leverage the economics of the cloud to build a solution designed around the needs of the end users – physicians, nurses, their staff, and to a lesser extent patients. While we are wary of EMRs at OVP given the fits and starts of the industry, the huge number of providers (at last count it exceeded 400), and the increasing concentration among large players, we have seen many entrepreneurs who recognize the need to create physician-focused HIT solutions, while other prominent startups such as PracticeFusion and ZocDocs have grown quickly by taking a simple and user-centric approach. As just a few examples, we have recently met with several startups that are bringing gamification and social network approaches to the world of employee wellness, and others building solutions to allow physicians to access critical patient information on their own mobile devices using simple, intuitive – and very consumer-like – user interfaces. Our portfolio company Instamed is attempting to solve the real-time communication disconnect between payors, patients, and practices to avoid situations such as rejection of coverage after a custom-built knee brace is already produced and delivered. I hope these entrepreneurs succeed, and inspire others to do the same, as I really am tired of filling out the same form six times.

We are investors in ProtonMedia, a company which enables advanced levels of collaboration by bringing remote people, in the form of avatars, and disparate data together in virtual meeting and learning environments. At the time we invested, it sounded like a stretch, yet there were major companies – in life sciences and in energy - using the product and willing to speak about its benefits.

This is a solution that is deemed to be much more engaging than Webex or GoToMeeting, given the level of interaction and the content sharing capabilities that it provides. This is also a solution with significant economic benefits over in-person meetings, especially when the distance is far, costs are high, and personal and professional time are both highly valued. So was the premise.

Last Friday, I had the chance to see ProtonMedia customer survey data from participants in major training sessions who used the Protosphere platform. I have to say – I was more than a little surprised by the extent to which the data supported the value proposition. In summary:

88% of those surveyed agreed or strongly agreed that the Protosphere solution was an effective method of delivering training

95% of those surveyed agreed or strongly agreed that using Protosphere had them more engaged than standard web tools such as WebEx or GoToMeeting

Thus 67% of participants were positive or neutral to Protosphere versus live in-person meetings. To me, this was very surprising, especially as this does not factor the corporate economic costs of travel, which depending on the distance of travel, can be as high as 23x in real-dollar savings by using Protosphere versus live on-site training sessions (documented by one major pharmaceutical customer).

To top it off – people learn in Protosphere. Tests taken after training suggest that people score equally after being trained in Protosphere as compared to in-person training, and may have modestly higher retention rates than if trained in Protosphere than those who participate in in-person training. In comparison, web-based tools measured well behind Protosphere and in-person training. This is not my data and this is not ProtonMedia data, but rather this is customer data that was collected independently and shared with the company.

While training is only one application for this solution, it is a proven one. Scientific poster boarding sessions have also been huge successes for ProtonMedia and have won awards for the company. Global sales meetings and product roll-outs have also been well received applications. Board meetings are another use case– including occasional meetings where we, as investors, “eat our own dog food” and conduct full board meetings through the virtual environment – and we are tough critics.

For products like this – sales are to the enterprise, but adoption is up to the people who use it. I am encouraged by the adoption story. I am encouraged by ProtonMedia. I would love to hear of other experiences with such virtual worlds.

In many term sheet negotiations, there is a huge focus on the pre money valuation, but many other deal terms can have a very big impact on the economics of the deal yet do not receive the focus they deserve. For example, important terms include:

Option pool – what is the increase in the size of the option pool, and is the increase created out of the pre money (the entrepreneur suffers the dilution) or the post money (the entrepreneur and the investor suffer dilution together)?

Liquidation preference – none, 1x, participating, etc.

Dividends – what is the rate, and are dividends converted to cash or can they be converted to stock?

Debt that will be converted at the time of the financing – is it included in the pre money valuation?

Below are two scenarios that show how the option pool treatment can significantly impact the economics of a deal:

Modifying the treatment of the option pool decreased the share price by 17%, dropped the founder’s percentage ownership from 60% to 56%, and increased the investor’s percentage ownership from 25% to 29% (while keeping the pre money valuation constant). This basic example is a good illustration of why comparing pre money valuations (without considering other key economic terms) can create an apples to oranges comparison when evaluating investment offers. At Osage we certainly consider the pre money valuation but ultimately focus more on share price, post money valuation, and post financing ownership.

Some terms have a very meaningful effect on how the exit proceeds are distributed, but these effects do not show up in comparisons of valuation, share price, and percentage ownership. So when evaluating a term sheet it’s also helpful to run a waterfall analysis at various exit scenarios to understand the impact of these terms, particularly the liquidation preference and dividends.

Most investors understand how to navigate the various terms because they do several deals per year. For entrepreneurs, negotiating these terms can be complex and confusing. To break through the clutter, consider the pre money valuation to be a starting point… and evaluate the post financing cap table and waterfall scenarios to understand what an investment offer means at the end of the day.

There are certainly many other important factors to consider when deciding on a term sheet (such as board composition, protective provisions, company/investor chemistry), but that is a topic for another post.

"Towards thee I roll, thou all-destroying but unconquering whale; to the last I grapple with thee; from hell’s heart I stab at thee; for hate’s sake I spit my last breath at thee. Sink all coffins and all hearses to one common pool! and since neither can be mine, let me then tow to pieces, while still chasing thee, though tied to thee, thou damned whale! Thus, I give up the spear!" - Moby Dick, Herman Melville

Whale Hunting has disappeared from much of the world as a commercial activity, driven by new sources of oil, a limited market for blubber, and concern about a species which risked being all but eliminated. That being said, whale hunting is live and well in enterprise software sales. And it is adequately named.

In traditional whale hunting, a voyage could be made or broken based on the ability to find, hunt, catch, and kill a small handful of whales without them first destroying you and your ship. The risks were high, as you could come back empty handed or you could be damaged by the whale even as it is ultimately landed. Even worse, you could find it, hunt it and ultimately be killed by the whale – stove-in, as they say, and quickly headed to the bottom. In software, whales are the big deals which are 10x or 20x the average deal or even larger. Whales can make a quarter, a year, or a company. Almost every company we invest in has had whales on the horizon and some have even landed. It is in the nature of the entrepreneur to seek and exploit the opportunity to jump ahead of plan and to put a company on a higher plane through one or a few deals. When in the chase, we rarely think about the risks and the opportunity costs of whale hunting.

Here are the challenges with a sales model which focuses on a whale hunting approach –

When you don’t land the whale, what do you have? A failed quarter? A shortage of cash? A crisis? It is so enticing to pursue one deal which can make your quarter versus ten or fifteen deals. The difference is that one is a binary outcome and the other is a matter of degrees. If you need 15 deals to make a quarter and you land 10, it is a mediocre quarter, growth may have slowed, but you still have ten new customers with the opportunity to up-sell, and with a bigger base of revenue to cover costs. If you don’t land the whale, you have nothing. Worse, often the whale is a long, slow process. The deal you thought was going to happen this quarter pushes to the next quarter and finally is decided two quarters later. Even if you win the deal in the end, you killed three quarters while winning a single “make the quarter” deal.

Hunting is in our blood; it drives adrenaline, and makes us wake up in the middle of the night. Process makes people sleepy and is not exciting. It is not in our blood. But process, especially the sales and lead generation process, leads to repeatable sales, repeatable growth, high value, and great exits. When the focus on the CEO and the VP- Sales is on the whale hunt, process is left behind and the company and its sales process does not mature. Everyone wants to be the whale hunter but the local fisherman feeds the family every day.

CEOs tell me – it is ok, we are hunting some whales but we have most of the team focused on the core repeatable opportunities. Really. It comes down to resources, time over task, and attention. The whales get the resources and the attention. Once you are in the hunt, it is hard not to throw as many resources as possible into trying to win. That is in our nature.

Spearing the whale is not the end of the story. Large game-changing customers make requests for enhancements or changes, have expectations, and have SLAs which can stretch an organization beyond a breaking point or take an organization far off direction in terms of roadmap or other areas of focus. Many whales have killed organizations after being caught.

At Osage we believe that building a scalable, repeatable lead generation and sales process if the greatest way to build value in technology companies focused on the enterprise customer. Often, this takes a culture shift from the early whale hunting which got the company to its first million of revenue and its first institutional investment. While we are not averse to big deals, we are averse to big deal focused, non-repeatable processes. For us, adrenaline gets flowing when revenue increases meaningfully year over year, when the metrics on lead generation and lead conversion move in the positive direction, or when retention and up-selling inside existing customers are meaningfully improved. I will take ten $100k deals over a $1M deal any day because I understand how ten becomes 20, which becomes 40, and also how I might tweak pricing over time as we gain traction in the market. The $1.0M one-off deal is hard to model and is dangerous even when hooked. And sometimes . . . small fish become really big fish. Selling a $100k deal into a Fortune 50 account and having the opportunity to expand horizontally and vertically may not be a whale, but it is a heck of a big and profitable fish. Processes for account management as well as pricing and contract structures that enable easy but profitable growth are the drivers for hooking the big ones – it is all about lifetime value, not the initial sale.

When I think of fishing, I like to think of the scenes from “A River Runs Through It”, where fly fishing and the motion of casting have evolved from craft to art and where one anticipates the jump of the fish before the fish realizes it is jumping. Translated to sales this means perfecting the process and understanding the target customer – proven formulas that work. Let’s leave the whales for others willing to risk more and walk away with less.

I had lunch yesterday with two interesting entrepreneurs who are early in building out their vision for a business. They have a big idea, a big market, and a surprising level of support and they are attracting real talent to their team. This is a technology solution and a business to business network and the idea inherently makes sense – for them or for someone else depending on the ultimate competitive context. I hope they succeed as this will be a great business to get launched in Philadelphia.

I first met with this team six months ago. At the time their plan was even bigger and even more ambitious. The company vision was thoughtful but early and the real red flag for me were the financial projection that showed over $1.0B in revenue in 2016 with EBITDA margins of 50%. How many enterprise software companies have achieved $1.0B in software revenue - ever? According to the Software 500 list – 68 companies had over $1.0B in revenue in 2011. How many had Net Income of over 50%? None. What this plan said to me was that the team was early, they thought their idea was big, and they confused a business plan with a market sizing exercise and they had no idea about their ultimate business economics. Yesterday, I met with this team again. They now have three pilot customers and a product which is a POC bolt-together representing a minimally viable offering. They have learned a ton and have refined their story and their strategy. They will learn more for sure, but the progress is admirable. Their financials? $70M revenue in 2016. Their net income margin? 50% +. As the company signs more customers and continues learning and evolving, surely this figure too will be reduced to something more in-line with industry averages.

I feel better about $70M than $1B. Call me crazy but when I read for business, I prefer non-fiction.

I look forward to my next lunch with this team – and maybe to our decision to invest.